How do the interest rates impact stock market?
1) Interest rates and stocks
When interest rates rise, consumers and businesses' cost of borrowing increase, this will decrease the consumer demand for goods and services and negatively impact corporations' bottom lines, thus putting pressures on stock prices.
2) Interest rates and bonds
When interest rates rise, bond yields rise, some investors will be attracted by the higher yields in the fixed-income products thus shy away from stocks, especially high-yield stocks that are typically viewed as bond proxies.
Investment Strategies in a Rising Rate Environment
1) Avoid long duration bonds
When interest rates keep rising, the bonds' (especially long term bonds) prices (note, not yields) will keep dropping, which means if you bought at $1,000, you probably could only sell far less than $1,000. If you do want to invest in bonds, invest in bonds with shorter duration which means they are less sensitive to rate rises or invest in loans whose rates could adjust up with rates, such as float-rate bank loans.
2) Invest in stocks that could benefit from rising rates and inflation
When interest rates and inflation go up, banks, industrial, and producers of basic materials' shares tend to go up as they benefit from rising interest rates and inflation.